Active Voice: Turnaround stories

Companies that have seen their share price depreciate sharply in the face of self-inflicted wounds, structural challenges, or cyclical headwinds, represent potential ‘turnaround stories’. In this article we look at the attraction of investing in these businesses, and evaluate the risks or opportunities they present.

‘Recovery stocks’ are those which may be suffering from an emotionally-battered share price or look oversold on the back of a profit warning or disappointing newsflow. Alternatively, there may of course be deeper-rooted problems around leadership quality, financial resources or the rise of competition where barriers to entry are low.

For any investment consideration, it’s important to fully understand the underlying issues. Deep-dive analysis allows us to assess if the process of restructuring will result in the ability of the company to redefine the business model. Strengthening the balance sheet is critical, predominantly because improvement here can create valuable strategic options. Failure to keep up with market trends or weak operations can be improved through deal flow, new product launches or better allocation of capital. Decision making is likewise crucial. Investors need to ensure they are comfortable that any strategic change has the potential to bring a positive transformation. Investing early in the restructuring phase may be considered a risky strategy.

We are mindful that some companies may languish in the mire for years - becoming a ‘value trap’ - while others may find it difficult to respond effectively to competitive or financial challenges. Inevitably there will be periods of highs and lows along the road for most of these companies and we must acknowledge that not every investment decision has a successful outcome. However, while the market turns a blind eye, we will consider researching those out-of-favour shares should we believe the opportunity for a business turnaround becomes more evident. Below are some examples in our actively managed equity funds which we consider to be strong turnaround stories.